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5 questions with AXA Investment Managers

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5 questions with AXA Investment Managers

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We asked Sebastien Proffit, Solutions Strategist at AXA Investment Management, about the use of a long-term credit fund and AXA IM’s experience of working with AMX.

 

AXA Investment Managers (AXA IM) is an active asset manager with a focus on long-term results and responsible investing. With £758 billion of AUM across asset classes, AXA IM has adopted a partnership approach to developing solutions that help institutions achieve their financial goals sustainably. Its flagship ‘buy and maintain’ credit strategy, at the heart of its cashflow driven strategies for UK pension schemes, is designed to increase the predictability of client cashflows and is fully ESG-integrated. It is central to the delivery of the first Long Term Credit Fund (LTC) fund on the AMX platform, providing schemes with access to a high-quality, pooled cashflow solution. AXA IM has raised £1.1 billion for its multi-client Long Term Credit (LTC) fund, which was launched as a strategy on AMX in 2019. This brings the total asset under management for AXA IM’s Buy & Maintain team in London to £18.2 billion as at 31 Dec 2020. We asked Sebastien Proffit, Solutions Strategist at AXA Investment Management, about the use of a long-term credit fund and AXA IM’s experience of working with AMX. For Professional Investors Only

 

1. How does the Long-Term Credit fund fit into a pension scheme’s journey plan?
 

Long-Term Credit invests in fundamentally strong, long-dated credit to provide predictable cashflows for UK DB pension schemes. These cashflows have become increasingly important to pay pensions as the number of cashflow negative schemes, and the degree of cashflow negativity within schemes, continues to increase. LTC has been carefully designed with the aim to deliver a cashflow profile to meet member benefit payments by paying out both the coupons and principal received from the holdings. The high quality of credit provides both a strong resilience to risk and decent market liquidity – important characteristics for pension schemes as they start focussing on the end game of their journey plan. While LTC is used as a core holding in many self-sufficiency portfolios, the liquid nature of the fund and similarity to typical insurance portfolios also offers investors the flexibility to target other end games, such as a buy-out or a series of buy-ins. As a result, LTC ensures that a scheme’s first step towards their end game provides the greatest flexibility possible.

 

2. How does LTC work with a scheme’s Liability Driven Investment portfolio?
 

Liability Driven Investment (LDI) mandates aim to reduce a scheme’s funding level volatility. LTC complements this by meeting schemes’ cashflow requirements. In addition to generating cashflows, LTC also contributes to the interest rate exposure (defined as PV01) and provides an expected return in excess of gilts. LDI management requires a different skill set, with LDI experts focussing on buying government bonds and derivatives. LTC-type strategies (typically called Cashflow Driven Investment or CDI strategies) require detailed credit analysis and knowledge about the specifics of each issuer and bond to minimise credit risk. We work alongside a number of external LDI providers – both during the transition into LTC and on an ongoing basis. We provide timely and relevant interest rate exposure (i.e. PV01) or cashflow reporting for the LDI manager to help maintain an effective hedging solution.

 

3. How do you ensure longer-term risks are appropriately looked at?
 

Within LTC, we aim to hold each bond until maturity to avoid unnecessary trading costs that can cannibalise investors’ returns over the long term. It is therefore essential we consider the risks over the lifetime of each bond we buy. As a first step, we undertake in-depth fundamental analysis at the issuer and sector level. Those which have a weak fundamental profile or a high uncertainty of future cashflows are discarded to bolster longer-term risk mitigation. Fundamental analysis for us includes environmental, social and governance (ESG) risks, which can often materialise over a longer time period. As a result, these are considered by the credit analysts and portfolio managers as an integral part of the fundamental analysis and maturity selection of the bonds. The portfolio construction process also focuses on longer-term risk mitigation by capping the maturity of lower quality bonds or those in sectors which have a low predictability of future outcomes, such as retailers or automotives. Unlike in the LDI space, where accurate matching of key rate durations is required to minimise funding level volatility, we believe it is more efficient to implement a CDI strategy using a “full profile” fund, such as LTC. A full profile approach allows for a holistic overview of credit risk within the fund and a focus on maximising the quality of the cashflows to avoid unnecessary turnover, duplication of credit risk and to reduce forced buying within a particular maturity bucket to maintain guideline characteristics. We believe that the only way to achieve efficient and predictable cashflows is to have a single profile fund.  

"Our partnership with AMX has allowed us to focus on solving the investment challenges ... while AMX delivers operational and reporting expertise."

4. Is there a right time to go into CDI?

Implementing CDI needs to be considered as part of a wider journey plan, however it is traditionally funded as a form of de-risking. CDI is often funded either from equities or riskier bond strategies, such as multi-asset credit or global credit which are not cashflow focussed. In either case, if the primary motivation is for risk reduction and cashflow matching, then CDI can always be a useful tool, irrespective of market timing. We do know of some schemes that chose to invest smaller initial amounts into LTC and waited for spreads to widen, such as during the H1 2020 sell-off, or for their funding level to improve before locking in additional amounts of cashflow generation. While these and other similar methods to optimise market entry points continues to remain a discussion point, the overall decision to invest into the LTC was driven by the wider desire to de-risk and plan for their end game.

 

5. How has AMX helped in delivering the proposition?

Our partnership with AMX has allowed us to focus on solving the investment challenges for our pension clients, while AMX delivers operational and reporting expertise. It has been a truly collaborative effort. One example has been to ensure that the LTC reporting contains all the metrics relevant to the fund’s investors and underlying members, including appropriate ESG metrics. We have also worked together to meet individual client circumstances. As an example, a client requested us to consider an in-specie transfer using a transition manager. While this would typically be operationally challenging and costly, the AMX team was able to work with our investment team to ensure a smooth transition into LTC.   

 

AXA IM Disclaimer: 

Not for Retail distribution: This document is intended exclusively for Professional, Institutional, Qualified or Wholesale Clients / Investors only, as defined by applicable local laws and regulation. Circulation must be restricted accordingly.

 This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2004/39/CE), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities. 

It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date. 

All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document.

Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited. 

Before making an investment, investors should read the relevant Prospectus and the Key Investor Information Document / scheme documents, which provide full product details including investment charges and risks. The information contained herein is not a substitute for those documents or for professional external advice. T

The products or strategies discussed in this document may not be registered nor available in your jurisdiction. Please check the countries of registration with the asset manager, or on the web site https://www.axa-im.com/en/registration-map, where a fund registration map is available. In particular units of the funds may not be offered, sold or delivered to U.S. Persons within the meaning of Regulation S of the U.S. Securities Act of 1933. The tax treatment relating to the holding, acquisition or disposal of shares or units in the fund depends on each investor’s tax status or treatment and may be subject to change. Any potential investor is strongly encouraged to seek advice from its own tax advisors.

Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 22 Bishopsgate, London, EC2N 4BQ.


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